Educational Articles

Performance of the Model Portfolios: July, 2012

Charles Clark
| August 23, 2012

What follows is a review of the performances of Value Line’s four Model Portfolios for the month of July. The effects of recent market action and any changes to the Model Portfolios’ respective holdings are found in each week’s Selection & Opinion (free sample here). Portfolios I, II, and III share a common benchmark, the S&P 500 Index (adjusted for dividends), which advanced 1.4% in July. Of these three, only Portfolio II gained more than the S&P 500 Index. Meanwhile, Portfolio IV also outperformed its benchmark, the Mergent Dividend Achievers (U.S. Broad), which moved up 2.5%. (Read the description of each portfolio’s general investment strategy.)

Portfolio I reported a modest gain of 0.3% for July. The earnings season was largely hit or miss for this group, and the misses tended to dominate its performance in the month of July. The most damage was done by our holding in the Industrial Services arena. These shares tend to be volatile, and investor sentiment can turn quickly. Accordingly, we have not been hesitant to take profits here when market support was high. And despite the drubbing taken in July, the stock is currently trading slightly above our purchase price. At this juncture, we continue to hold the shares. Elsewhere, Timken (TKR) shares also fell sharply in the wake of the company’s earnings report for the second quarter, giving the portfolio another roundhouse kick. There were four trades made in July. In addition to Timken, we sold our holdings in Kirby Corp. (KEX), Ryder System (R), and Apple, Inc. (AAPL). Although the losses taken on TKR, KEX, and R shares were in the double-digit range, the profit realized from holding Apple shares made up for most of the red ink. The resulting open positions in the portfolio were taken by stocks from the Computer Software, Pharmacy Services, Electronics, and Restaurant industries.

Portfolio II once again performed nicely, posting an advance of 2.4% in July, a full percentage point ahead of its S&P 500 benchmark. The high quality of nearly all of the portfolio’s holdings once again worked in its favor. Indeed, many seemingly prefer the stability of owning shares in well established companies, particularly given the wide swings in the stock market in the last few months, on the heels of slowing global economic expansion and the financial problems in the euro zone. Notably only four of the 20 stocks held in the portfolio lost ground in July, with our position in the Air Transport business slipping the most. Meanwhile, our top two performances came from the Environmental and Machinery industries. And, as always, Portfolio II’s performance was supported by the dividend income received, which accounted for some 5% of the increase in its net asset value for the month. We chose to stand pat in July, staying with the composition with which we ended the first half.

Portfolio III posted a loss of 1.4% in July. Although winners outnumbered losers, it was the sharp decline in our holding in the Educational Services industry that essentially determined the portfolio’s performance for the month. Indeed, the for-profit education business continues to struggle with new rules under the gainful employment regulations. In consequence, the stocks of these publicly traded companies have found little investor support of late. On the positive side of the ledger, though, our positions in the Oilfield Services/Equipment, Auto Parts, Internet, and Telecomm Equipment sectors performed quite well. There were no trades in July. However, we remain on watch for quality companies whose shares are trading at favorable valuations relative to their long-term prospects.

Finally, Portfolio IV registered an increase of 3.8% in July, nicely ahead of its benchmark. We note this portfolio has recorded gains in six of the seven months completed so far this year, with the exception being the month of May when the stock market, as a whole, took a dive. (Portfolio II also shares this distinction.) Although the overall quality of the portfolio’s holdings is more varied than Portfolio II’s, its large income component is also an important factor in its performance. On point, the dividend income received in July accounted for 5.5% of the increase in its net asset value for the month. Meanwhile, of the portfolio’s 20 holdings, only our position in the Basic Chemical sector declined. Our top performer hailed from the Paper/Forest Products business. In our quest to keep turnover low, we made no trades in July.

Through the seven months of 2012, the market value of each of the four Model Portfolios has advanced. Moreover, Portfolio II’s progress over the last two months has worked to push its performance ahead of its S&P 500 benchmark. Portfolio IV has also had a good run recently, and its performance through July is just shy of its Mergent Dividend Achievers benchmark. At this writing in mid-August, the stock market has tracked forward, though we doubt the volatility experienced in the last few months has vanished, so investors are likely to continue being challenged. Finally, despite the difficulties Portfolios I and III have faced in recent months, the Model Portfolios, taken as a group, each have a unique performance objective, so they should continue to appeal to a range of investors with varying appetites for risk and return desiring exposure to the equity markets. Alternatively, the Model Portfolios can serve as a source of some of our best investment ideas.

As of this article’s writing, the author did not have positions in any of the companies mentioned.